For years, the real estate sector has been identified as a lucrative sector in different countries, Nigeria inclusive. This can be attributed to various reasons some of which are: Real estate has a predictable cash flow, real estate appreciates in value, real estate can be leveraged that is; mortgage can be used to reduce the amount of investor capital required to purchase a property, real estate has a lower tax rate e.t.c
The real estate sector is quite a vast sector. It involves the purchase, ownership, management, rental, and/or sale of real estate for profit. The vastness of this sector makes it easier for people to invest in it. However, people are oblivious to this fact and as a result, are still holding back because they do not fully understand how investment in real estate works. To understand this, one must first understand the factors that drive the sector, below are four factors that drive the real estate investment in Nigeria.
1. Interest Rate: Like every other asset, interest rates have a far-reaching effect on real estate investments. When considering buying a property for a mortgage, you have to calculate the current interest rate and decide if it would be in your favor. The changes in interest rates affect a buyer’s purchasing power. How is this so? If interests are lowered, it will lower the cost of getting a mortgage to buy the home likewise, if interests are increased, the cost of getting a mortgage to buy the house increases too. Put simply, interest rates determine the demand for real estate.
2. Government Policies: Government policies, also known as the legislation, is another factor that influences real estate investment. Examples of government policies that affect the real estate sectors are Tax Credit, Subsidies, and Deductions.
For instance, in 2019 the Nigerian Bureau of Statistics (NBS), in its report, revealed that the GDP growth for the real estate sector was 0.93 percent as that this was as a result of the poor government policies that made it increasingly difficult for tenants to pay rents accompanied by the low liquidity in the economy.
Being informed about current government incentives can help you make important investment decisions, determine changes in supply and demand, and identify potentially false trends.
3. Market Demand: First of all, it is pivotal to establish the fact that real estate is always in demand because of constant growth in population and increased unavailability of land. However, sometimes, this demand drops or increases. This is therefore an important factor in the real estate sector. An oversupply of homes or land in a given area usually results in a drop in prices and vice-versa.
4. Demographics: When the word demographic is being mentioned, a lot of interpretations come to mind but what does demographic truly mean and what role does it play in real estate? Demographics describe the composition of a population including its age groups, race, income, population growth, gender, and others.
Demographics are a huge determining factor in real estate investment because they determine the market trends. For instance, Baby boomers who were born between 1945-1964 are an excellent example of how demographics change real estate. The transition between these boomers to retirement led to more generational trends.
When these factors are properly understood, investing in real estate becomes simplified. It becomes easy for interested parties to tap into the various opportunities real estate presents.